Too many Canadians buying U.S. vacation property with an investment focus have no idea about what’s really at stake.

A home is advertised for sale at a foreclosure auction in Pasadena, Calif., in this Aug. 14, 2007 file photo.

Published on Sun Nov 04 2012

A lot of Canadians’ current interest in US real estate markets has strong ties to the snowbird community, that group of retired and semi-retired Canadians who routinely migrate south to escape the cold winter temperatures of their home country.

Over the last couple of years, these seasonal US residents have noticed the dramatic proliferation of Foreclosure and For Sale signs, and a growing number are asking if they should be treating their routine US holiday homes as investment opportunities. The answer is a resounding maybe! With US residential real estate prices at deep discounts, can these people reasonably expect to buy a US property, use it personally for part of the year, and then rent it out the rest of the time? If this is what you’re thinking of doing, we recommend extreme caution.

Residential real estate is a major purchase. However, we see too many Canadians buying vacation property with an “investment” focus, who have no real clue about what’s really at stake — it’s like a “field of dreams” strategy. So let’s be clear: just because you buy it, does not mean vacationers will rent. That doesn’t mean that this strategy cannot work. But it won’t work unless you treat it like a business strategy and have a solid marketing plan in place to make sure the property meets your revenue projections.

There are several key reasons why US vacation homes are not as easy to market as some Canadians expect, beginning with the fact that people looking for US vacation property currently have a great deal of choice. Why would they stay in your two-bedroom condo in a gated community for people aged fifty-plus, when they may be able to rent a house with its own pool or a beachfront property?

Timing is another concern that many people fail to incorporate into their vacation-home investment dream. For all of the differences between the Canadian and US climates, our summers and winters follow a remarkably similar path. If you plan to use the vacation property during the coldest Canadian months — aka, a prime winter vacation period — who’s going to rent it during the off-season? And there can be other problems, too. For example, the southern United States may be beautiful in the fall, but that’s also prime hurricane season. In other parts of the United States, tornado season coincides with prime summer vacation periods.

Another factor to consider is financing. While some American banks will lend to Canadians to buy a second home, your options are limited. And if you are buying property as an investment, be aware that these loans are hard to come by because US banks know that real estate investment looks easier than it really is.

Think about what that means. The US lender is banking on your ability to meet a second-home payment. They think you have what it takes to make those payments. If you’re buying that home because you think someone else (a renter) is going to make those payments, be careful. This strategy is not an investment if it puts your lifestyle at risk, so you have to consider that your investment property will have to be financed out of cash or against your existing Canadian property.

Financially, you have to consider your long-range view of the value of the Canadian dollar. Currently at par, the strong dollar makes investing in the United States attractive. If the US dollar increases against the Canadian dollar over time, your income and any appreciation in property values will be in US dollars, offering a higher rate of return. And as a Canadian, once you invest in a rental property in the United States, you are going to have to file a US tax return, and pay US income taxes on your US income. This will be credited against any Canadian tax owing on the income, but you are going to have to hire a cross-border professional advisor to structure your investment so that you reduce liability and US estate taxes.

You should also think about property management, because seasonal contracts are difficult to set up and tough to maintain. It makes sense to factor quality property-management fees into a buy-and-hold investment cash-flow strategy. But if your place is only rented a few weeks of the year, how will you handle ongoing maintenance or repair issues, let alone make sure the place is properly cleaned between vacation tenants? You can hire property managers, but if the property’s not renting the way you figured it might, that may not be an affordable option.

From a control point of view, you will not be able to “touch” the property or undertake renovations or management yourself, largely because of the distances involved — much as if you were living in Toronto and wanted to invest in Calgary or Vancouver. The added wrinkle for the American market is that US law prevents you from working in the US without a visa. You will have to rely on American contractors and property managers or become a partner or joint venture with Americans and rely upon their capabilities. Alternatively, you can buy “turnkey” properties from providers, whose business is buying through foreclosure, short sales or “good” deals, and renovating, renting, and providing property management, which makes your cost and returns more defined.

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